Bridging the gap from 57 to state pension 67

ChocolateWombat

Hi. First timer here and I'm not a financial whizz or tax expert and don't have a big understanding of financial products beyond cash really. My husband and I hope to retire at 57 (me) and him 3 years later at 60. This is our plan to tide us over until our 2 DB pensions kick in and we get state pension at 67. Will this give us a decent retirement and is there a better way to do it? Only just setting out on the plan and willing to adjust if we can have a better retirement. - we are both in DB public sector pensions with money in old the old final salary schemes and money in the new career average schemes. 1. I retire at 57 leaving DH to work full time until 60 (living on his earnings if £50k) 2. 3 years later (60 years old) I can access £10k of my DB pension and DH will go part time earning £30k.I will also get £30k tax free lump sum. 3. 5 years later at 65 DH will retire and be able to access the final salary part of his DB pension (£5.5 K). With the £10k I already get, and by releasing £15k of my lump sum we will have £25k. 4. 2 years later at 67 DH can have his full £22k DB pension and I can have the full £17k DB pension. We will both have full state pensions of £9k each. Questions - we should have in excess of £40k each year except for between 65 and 67 when we will have £25k. Is this enough? Is there a way to adjust our finances so we don't have so much more when we are older and less likely to want so much so we can have more early on? Do these plans look realistic? MAny thanks.

ChocolateWombat

Sorry, I laid this out so it was easy to read and follow, but all gaps and paragraphs etc have been removed.

Dazed_and_C0nfused

As you are both under transitional rules have you checked your State Pension forecasts on gov.uk to ensure you definitely will reach £175.20?

You may well do but definitely worth checking.  Make sure you read the forecast in full, particularly the bit about what you have accrued to date (usually to 5 April 2020) rather than the headline £175.20.

Dazed_and_C0nfused

1. I retire at 57 leaving DH to work full time until 60 (living on his earnings if £50k) 

That is quite tax inefficient, you would have an extra £2,250/year income between you if you partially retired and earned £11,250 and he went part time and earned £38,750.

3. 5 years later at 65 DH will retire and be able to access the final salary part of his DB pension (£5.5 K). With the £10k I already get, and by releasing £15k of my lump sum we will have £25k

The figures don't add up.  £5.5k + £10k + £15k is £30.5k not £25k.

Which do you want, £25k or £30.5k?

Questions - we should have in excess of £40k each year except for between 65 and 67 when we will have £25k. Is this enough? Is there a way to adjust our finances so we don't have so much more when we are older and less likely to want so much so we can have more early on?

How longs a piece of string?  Plenty would be over the moon with £40k pension income and it's actually going to be £57k combined from State Pension age.

As for getting more earlier and less later the two most obvious.things which spring to mind are partial retirement (potentially for both of you) and the McCLoud judgement.  You may have the potential to move some career average pension into the final salary scheme.  The career average tends to be more generous in cash terms but final salary can normally be accessed earlier without any reduction.

Another option would be start a DC pension and build that up over the next few years and it can then be accessed and fully used up during the two years you are most concerned about.

Audaxer

Are you sure you can't get access to your full DB pensions until you are both 67? It looks like from 67 you will have £39k in DB pensions plus two State Pensions at around £9k each if you get to the maximum SPs. So even if you took one of your DB pensions early at a reduced amount, would that not give you more income before 67 as it looks as if you will have much more than you need from 67 if you wait for the full DB pensions?

RetSol

I dream of having an OH willing to work until NRA in a public sector pension scheme...and two full SPs to follow.  Don't worry about it - it's cushty. And, plus, you can live on less than you think. 

hugheskevi

You seem to starting from a position of only accessing your pensions at their Normal Pension age and working around that. You also end up in a position where you income increases sharply at State Pension age (from £40 to £57K).

You may wish to consider smoothing your income by commencing some of the pensions early (especially if you retire at 57, taking your pension early would give you taxable income and so take advantage of your Personal Allowance), and probably putting money into DC pensions. It would also be helpful to work out what income you think you need, then you have a target income at State Pension age, and can plan around that, and how to smooth out income in the years prior to that.

You want to be using both of your Personal Allowances each year ideally for tax efficiency.

What are your husband's retirement preferences? Would he like to retire fully, or does he want to work part-time?

I think your retirement planning should start from what you need/want, then look to shape what you have and will earn to fit those requirements. Starting from a position of what pension you will get at Normal Pension age is going to significantly limit your options.

Retireinten

If you haven't already, visit The Number thread. It will help you work out what your retirement income goals are. We're aiming for net £36k household income from 55.  This should give us more disposable income than we have now as a family of 4 but I want to build in a contingency and we will have more time on our hands to spend! 

I'm not sure you can split your DB schemes, taking one part at 60 and another part later... What public sector schemes are you both in?

The plan is for us both to retire within a year of each other (hubby is a bit younger than me).  We will be using ISA savings to fund years 55-58, husbands work pension will kick in at 58 (drawing down at £16.5k ish a year until 68, so no tax to pay when the 25% tax free portion is taken into account), I will use a private pension from 58 - 60, again drawing down up to my tax allowance, ISA savings will be used to top up income to £36k, from 60 I will access all of my LGPS which is currently worth £14,200 (actuarially reduced) and steadily growing...

When state pensions kick in husbands pension will be nearly exhausted. There will be just enough in there hopefully for him to make use of the rest of his tax allowance until he's in his early 80's


I will be a taxpayer but hubby is unlikely to be in retirement. We also want a decent cash lump sum to cover big purchases in retirement (£75k to £100k ideally - some of this may end up in ISAs at some point). 

This plan is all linked to our target retirement income and we save quite a bit each month to achieve this. We are both basic rate tax payers.

I think you need to work out your target income and when you both want to retire.... is your husband happy to continue to work for another 8 years when you've retired, for instance?! 

I have calculated that my DB pension becomes less useful to me after March 2022.  Another 7 years in the scheme from this point onwards and all it does is reduce my ISA (income top up) requirements by about £25k between ages 60 and 68 and gives me a greater income than I need post age 68! Not sure what the answer is to be honest, but it's a nice problem to have! 

In your shoes I would decide what your retirement income target is, your preferred retirement ages, work out the gaps in your savings pre and post SPA and look at how you fill those gaps as tax efficiently as possible...

(Sorry for the long post, got carried away😳) 

ChocolateWombat

Thanks so far everyone. Appreciated. A few answers; A. Yes the plan is for me to retire at 57 and DH who is same age to do until 60 full time before becoming part time until her will retire fully at 65. It might be more tax efficient for us both to become part time but I don't like working and he does and he's happy to keep going.......which I appreciate is very forty the for me. B. In time period 3 when we are aged 65-7 I made an error in adding up. We will have £10k from my DB pension, £5.5k from DHs and £15k from my lump sum to live on, for each of those 2 years which totals £30.5k. This would be our lowest income level I retirement. C. Re when we can take different pensions, we are both transition memebers in the civil service and teacher schemes. The career average part can only be taken at 67 (without actuarial reduction) but the final salary elements can be taken at 60 and 65. Mine is 60 and DH (who started a bit later) has 65 for that element of the pension. I understand that it is perfectly possible to take the final salary part of the pension at the earlier NPA whilst waiting to take the later part....this means neither experiences an actuarial reduction. D. I have checked the state pensions forecasts. Both need a further 10 years of contributions to get to the full state pension. I have 9 years until I will be 57 and retire, so I will get close and just buy the extra year for £750 ish. DH will easily reach the full level before retiring. We both have COPE elements in our state pension documents but because we can both work lots of years after 2016, still seem able to get to full state pension. I've read lots on MSE about exactly what COPE means and doesn't mean for the state pension and think I'm correct in my understanding. Further questions SOme people are recommending taking one of the pensions early to give more income at an earlier stage.....is that a good idea as the actuarial reductions seem so punitive? We could afford to save more now to provide some bridging money for the period between 60 and 67. What is a good way to do this if we basically have about 10-12 years to do this - perhaps £500 per month? Regarding a smoothed target income....I don't know beyond seeing the suggested figures for comfortable retirement for a couple being about £30k and about £45k for luxurious retirement. We are fairly careful and currently have a gross income (earned equally) of about £85k and both avoid higher rate tax. We already have no mortgage and enough savings to ourchase a small buy to let property without a mortgage, which would generate a further small income (about £6k after costs we think) leaving us about £50k remaining in savings. With 10 years to go, we will be able to afford to save a decent chunk over that period - probably £2k per month but don't want all of it in pension products but can see some would be good. Thanks so much for your advice, it is so helpful. And we feel encouraged that our position is reasonable and a decent retirement might be possible.....it's hard to know until you start looking at this kind of point.

Dazed_and_C0nfused

SOme people are recommending taking one of the pensions early to give more income at an earlier stage.....is that a good idea as the actuarial reductions seem so punitive? 

Have you actually checked some figures?

I'm not convinced that it is punitive.

In fact it seems likely that some people affected by the McCloud judgement may be better opting to stay in the new Alpha scheme and then taking that pension at 60 with an actuarial reduction as that will produce more pension income in the long term compared to the Classic scheme.

If you earn say £25k a year in Classic gets you £312.50 plus one off TFLS of £937.50.

So by age 80 you have received £7,187.50.

Alternatively a year in Alpha accrues £580 with no TFLS.  Take that at 67 and your £580 drops to £398.46.  By age 80 you have received £7,969.20.

Obviously a promotion late on in your career would no doubt sway things to Classic.

We will have £10k from my DB pension, £5.5k from DHs and £15k from my lump sum to live on, for each of those 2 years which totals £30.5k. This would be our lowest income level I retirement.

You both have unused Personal Allowance so a common choice would be make contributions to a relief at source pension such as a SIPP or personal pension.

Each £500 you contribute gets a 25% uplift giving you £625 in the pension fund.

Between you you could then take £9.5k/year without having any tax to pay (£10k + £5.5k + £9.5k = £25,000).

That type of pension planning is increasingly being used as a short term bridging option and isn't intended to provide an income for the rest of your life, you have the DB and State Pensions for the longer term.

hugheskevi

Dazed_and_C0nfused said:

In fact it seems likely that some people affected by the McCloud judgement may be better opting to stay in the new Alpha scheme and then taking that pension at 60 with an actuarial reduction as that will produce more pension income in the long term compared to the Classic scheme.

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Obviously a promotion late on in your career would no doubt sway things to Classic.

Alpha with actuarial reduction commonly beats classic paid at NPA. Even a promotion late in career has very little impact on that position, due to the final-salary link which continues after moving to alpha.

Take someone earning £30,000 with 29 years of service in classic who gets a promotion to £40,000 then works one year and retires. This is intended to portray a fairly extreme promotion late in career scenario, with a 25% increase in salary just a year before retirement.

If they remain in classic, they have a pension of (30/80) * £40,000 = £15,000 and a lump sum of £45,000.

If they instead have alpha for their last year, they have a classic pension of (29/80) * £40,000 = £14,500 and a lump sum of £43,500. They also have an alpha pension of £40,000 x 2.32% = £928 which after actuarial reduction for payment at age 60 rather than 67 is £637.54. So the comparison is between a pension which is £137.54 higher compared to a lump sum of £1,500. Most would consider the pension to be better value than the lump sum, ie, the move to alpha rather than stay in classic scenario gives the better pension outcome, despite the late career salary increase.